Ride sharing service Lyft (NASDAQ: LYFT) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 3.04% year on year to $1.02 billion. The company also expects next quarter's revenue to be around $1.14 billion, roughly in line with analysts' estimates. Lyft made a GAAP loss of $114.3 million, improving from its loss of $377.2 million in the same quarter last year.
Lyft (LYFT) Q2 FY2023 Highlights:
- Revenue: $1.02 billion vs analyst estimates of $1.02 billion (small miss)
- EPS: -$0.30 vs analyst estimates of -$0.46 (35.1% beat)
- Revenue Guidance for Q3 2023 is $1.14 billion at the midpoint, above analyst estimates of $1.09 billion
- Free Cash Flow was -$112 million compared to -$121 million in the previous quarter
- Gross Margin (GAAP): 40.6%, up from 23.7% in the same quarter last year
- Active Riders: 21.5 million, up 1.63 million year on year
Founded by Logan Green and John Zimmer as a long-distance intercity carpooling company Zimride, Lyft (NASDAQ: LYFT) operates a ridesharing network in the US and Canada.
Uber created the first ride hailing app, allowing users to summon black limousines via their mobile devices, an innovation that disrupted modern transportation. Lyft followed and expanded the service to the mass market, positioning it as a casual, friendly carpool experience that aimed to appeal to younger generations. Initially, Lyft’s drivers had a pink mustache affixed to the grill of their car, which has since been replaced by an “Amp” device, which lights up the car’s dashboard to help riders easily find their car.
The company’s value propositions are multiple. For individuals, Lyft effectively lowered the cost per mile for taxi transportation vs. legacy cabs, while providing ease of use and convenience. For drivers, it has provided flexible earning opportunities.
The iPhone changed the world, ushering in the era of the “always-on” internet and “on-demand” services - anything someone could want is just a few taps away. Likewise, the gig economy sprang up in a similar fashion, with a proliferation of tech-enabled freelance labor marketplaces, which work hand and hand with many on demand services. Individuals can now work on demand too. What began with tech enabled platforms that aggregated riders and drivers has expanded over the past decade to include food delivery, groceries, and now even a plumber or graphic designer are all just a few taps away.
Lyft’s (NASDAQ: LYFT) main competitor in ride hailing is Uber (NYSE:UBER).
Sales Growth
Lyft's revenue growth over the last three years has been strong, averaging 22.9% annually. This quarter, Lyft reported rather lacklustre 3.04% year-on-year revenue growth, missing analysts' expectations.
Guidance for the next quarter indicates Lyft is expecting revenue to grow 8.18% year on year to $1.14 billion, slowing down from the 21.9% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 7.05% over the next 12 months.
Usage Growth
As a gig economy marketplace, Lyft generates revenue growth by expanding the number of services on its platform (e.g. rides, deliveries, freelance jobs) and raising the commission fee from each service provided.
Over the last two years, Lyft's users, a key performance metric for the company, grew 22.8% annually to 21.5 million. This is strong growth for a consumer internet company.
In Q2, Lyft added 1.63 million users, translating into 8.19% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Lyft because it measures how much the company earns in transaction fees from each user. This number also informs us about Lyft's take rate, which represents its pricing leverage over the ecosystem, or "cut" from each transaction. 
Lyft's ARPU growth has been strong over the last two years, averaging 9.19%. The company's ability to increase prices while rapidly growing its users reflects the strength of its platform, as its users continue to spend more each year. This quarter, ARPU declined 4.76% year on year to $47.51 per user.
Pricing Power
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Lyft's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 40.6% this quarter, up 16.8 percentage points year on year.
For gig economy businesses like Lyft, these aforementioned costs typically include server hosting, customer support, and payment processing fees. Another cost of revenue could also be insurance to protect against liabilities arising from providing transportation, housing, or freelance work services. After paying for these expenses, Lyft had $0.41 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Lyft's gross margins have been trending up over the last 12 months, averaging 34.4%. This is a welcome development, as Lyft's margins are below the industry average, and rising margins could suggest improved demand and pricing power.
User Acquisition Efficiency
Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Lyft grow from a combination of product virality, paid advertisement, and incentives.
Lyft is efficient at acquiring new users, spending 34.2% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates relatively solid competitive positioning, giving Lyft the freedom to invest its resources into new growth initiatives.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
This quarter, Lyft's EBITDA came in at $41 million, resulting in a 4.02% margin. The company has also shown rather mediocre profitability for a consumer internet business over the last four quarters, with average EBITDA margins of -5.72%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Lyft burned through $112.1 million in Q2, increasing the cash burn by 133% year on year.
Lyft has burned through $354.4 million of cash over the last 12 months, resulting in an uninspiring negative 8.48% free cash flow margin. This low FCF margin stems from Lyft's capital intensive business model and desire to stay competitive.
Key Takeaways from Lyft's Q2 Results
With a market capitalization of $4.15 billion, Lyft is among smaller companies, but its more than $638.4 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
It was great to see Lyft's optimistic revenue and adjusted EBITDA guidance for next quarter, which exceeded analysts' expectations. In addition, adjusted EBITDA in the quarter was also well ahead of expectations. Those really stood out as positives in these results. On the other hand, revenue in the quarter missed, although only by a small amount. Zooming out, we think this was still a decent quarter, showing that the company is staying on track. Sentiment on the stock has been declining as well, which is why the stock is up big on solid but not amazing results. The stock is up 11.4% after reporting and currently trades at $12.89 per share.
Is Now The Time?
When considering an investment in Lyft, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in the case of Lyft, we'll be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its growth in users has been strong, the downside is that its gross margins make it extremely difficult to reach positive operating profits compared to other consumer internet businesses and its operations are burning a modest amount of cash.
At the moment Lyft trades at 16.8x next 12 months EV/EBITDA. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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